Markets & Finance

S&P Upgrades ImClone

June 07, 2005

ImClone Systems (IMCL): Upgrades to 4 STARS (buy) from 3 STARS (hold)

Analyst: Frank DiLorenzo, CFA

ImClone announced that an independent committee confirms that Erbitux plus radiation shows improved prevention of the spread of head and neck cancer beyond that area relative to radiation alone in a 424-patient Phase III trial. We continue to assume ImClone will file for FDA approval in this use by the end of 2005, with approval by mid-2006. While our earnings per share estimates of $1.03 for 2005 and $2.03 for 2006 are unchanged, we expect improved news flow ahead. We continue to assume peak annual Erbitux sales of $1.4 billion in the U.S. by 2012. Based on net present value analysis, our target price remains $42.

General Motors (GM): Reiterates 1 STAR (strong sell)

Analyst: Efraim Levy, CFA

Kirk Kerkorian's Tracinda Corp. says it will purchase the 18.9 million GM shares submitted under its tender offer for up to 28 million shares at $31. Although undersubscribed, this will raise Tracinda's stake to 7.2% of GM's common, from 3.9%. We expect Kerkorian to ultimately push for changes at the company that he believes will give him a return on his investment. Although it is possible that Tracinda could come back with another, even higher, offer, and despite GM strategies announced yesterday for improving performance, including cutting 25,000 jobs by 2008, we still see challenges ahead.

Texas Instruments (TXN): Reiterates 3 STARS (hold)

Analyst: Amrit Tewary

During its mid-quarter update, Texas Instruments raises the midpoint of its second-quarter sales guidance to $3.18 billion from $3.12 billion. The new guidance suggests about 7% growth from first-quarter. Also, the company ups its second-quarter earnings per share guidance to 27 cents to 30 cents from 25 cents to 29 cents, citing higher factory utilization and tighter cost controls. On slightly higher sales and margin assumptions, we are raising our second-quarter earnings per share estimate to 29 cents from 26 cents, full 2005's to $1.18 from $1.10, and 2006's to $1.27 from $1.18. We are also upping our 12-month target price to $31 from $27, based on our revised p-e and price-to-sales analyses.

McDonald's Corp. (MCD): Reiterates 5 STARS (strong buy)

Analyst: Dennis Milton

April systemwide sales grew 5.9%, mostly reflecting same-store sales growth of 1.8%, year to year, and the translation benefits of a weaker dollar. Same-store sales grew 4.2% in the U.S., but fell 1.4% in Europe and 0.6% in the Asia-Pacific/Middle East/Africa region. These results are slightly below our forecast, but came against difficult same-store comparisons (7.4% overall). Our 2005 earnings per share estimate remains $1.96, and our 12-month target price at $38. At 15 times our 2005 estimate, McDonald's shares are at a slight discount to peers, despite what we see as the company's superior product innovation.

IAC InterActiveCorp (IACI): Reiterates 3 STARS (hold)

Analyst: Scott Kessler

IAC announced the completed sale of its 5.4% common interest and its preferred stake in Viviendi Universal Entertainment to NBC Universal in a transaction valued at about $3.4 billion. After-tax consideration includes about $1 billion in cash, 56.6M IAC common shares, and $100 million in advertising across NBC Universal's networks over the next three years. IAC and Vivendi Universal also agreed to dismiss pending litigation between them. We think these actions add shareholder value to IAC through asset monetization and balance-sheet simplification and would hold the shares.

Computer Associates (CA): Maintains 3 STARS (hold)

Analyst: Zaineb Bokhari

Computer Associates completes its acquisition of Concord Communications. We currently expect Concord to add $75 million to $125 million to Computer Associates's fiscal 2006 (ending March) revenue, accounting for 2.0% to 3.5% of the 9% year-to-year revenue growth we forecast for Computer Associates, and we expect the acquisition to be neutral to slightly accretive to fiscal 2006 operating earnings per share. We are maintaining our fiscal 2006 earnings per share estimate of 92 cents and our 12-month target price of $34. We continue to expect Computer Associates to be a consolidator in its space, targeting smaller vendors within its strategic systems management and security segments.

Noble Energy recently held an analyst conference to reveal business developments and strategy now that it has closed its merger with Patina Oil & Gas. The company has transformed itself from a Gulf of Mexico operator to a global exploration and production company with substantial assets in high-production basins. Given the company's project schedule, we believe production of over 200 million barrels per day by the end of 2006 is achievable. We see 2005 earnings per share at $8.45, and 2006's at $9.80. We are raising our target price $5 to $85, reflecting a p-e of 10.1 times on our 2005 estimate, in line with peers.